Futures vs Options- Difference between Future and Option contracts
Jul 10, 2020

Futures vs Options- Difference between Future and Option contracts

The futures contract is an agreement between two parties for the buying and selling of a particular asset at a future date through a standardised, exchange-regulated process. Options trading, on the other hand, is a flexible financial instrument where buyers decide if they wish to trade the asset or withdraw from it.

If you are not sure about the details of futures and options trading first read this detailed tutorial about financial derivatives.

Now let us find out the differences between options contract vs futures contract.

Characteristics Future Contracts Option Contracts
Obligation In the futures contract, investors remain obliged to buy and sell assets at a pre-specified rate during the end of the tenure. In the options contract, though buyers get the right of purchasing assets at a fixed price, there is no compulsion to commence with the transaction.
Risk In the futures contract, buyers must compulsorily trade an asset on a future date, even if the market condition is not conducive. So, there is a high risk involved in purchasing futures derivatives. Since traders can decide whether they wish to commence the transaction or withdraw from it, there is less risk involved in the options contract.
Advance Payment Investors do not require any advance payment while entering a futures trading deal. However, at the end of the tenure, they need to pay the pre-determined price of the asset. Investors need to pay the strike price (premium) for entering an options contract deal. If he decides to withdraw from the contract, then he losses the premium amount.
Profit and Loss There is a scope of unlimited profit or loss in the futures trading. Though investors can make an unlimited profit through the options contract, there is a limited chance of incurring a loss.
Preferred Financial Instrument The futures contract is a preferred financial instrument for speculators and arbitrageurs. Options are a preferred financial instrument for hedgers.

Now you can start investing in share market using these advanced financial instruments and start making a fortune!

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